Lionbridge, the largest company on CSA Research’s list of the top 100 commercial LSPs in 2014, announced that it would buy Switzerland-based CLS Communication (#11) in a deal expected to close in the first few months of 2015. Once it does, Lionbridge will be on track to be a US$600 million company. We asked Lionbridge’s Chief Sales Officer Paula Shannon about the acquisition and plans for CLS.

Lionbridge is expanding the traditional part of its business. The company is acquiring CLS to get stable, regular revenue in industry sectors that diversify its core business – something that is important to financial analysts concerned with the high concentration of revenue coming from high-tech customers such as Microsoft with their spikey, episodic product releases. The purchase of a traditional LSP is meant to mitigate that exposure by increasing Lionbridge’s business in attractive and less volatile markets such as finance, life sciences, and manufacturing.

It will pay roughly US$77 million. The purchase price works out to be 87% of CLS’s average revenue for the last three years – that’s in line with the range of 0.7 to 1.2 of trailing turnover that we typically find in the language services sector. Lionbridge will fund the acquisition with cash on hand and a line of credit from HSBC. Shannon noted that the EBITDA multiples look very attractive both at acquisition and following the integration of the two companies. CLS has been majority-owned since July 2009 by Swiss private equity firm Zurmont Madison, which reportedly has been working over the last year to cash out its position after five years of ownership. During that period, the company acquired Lexitech in Canada and 4-Text in Germany, additions that substantially increased CLS’s headcount and revenue.

The CLS brands will remain active. In a break with its earlier practices, Lionbridge will keep the brands of the acquired company, appending the tagline “A Lionbridge Company” to CLS Communication, CLS 4-Text, and CLS Lexitech. While we expect that Lionbridge will have these brands focus on their respective markets, it does plan to integrate back-end systems where it makes sense and to make the transition seamless in the eyes of the customers.

System integration will be swift. Shannon told us that Lionbridge learned from its last major acquisition, Bowne Global Solutions in 2005, that it has to move much more quickly and definitively in gaining efficiencies. At the top of its list will be unifying the two companies’ management systems for production, projects, vendors, and customer relationships. However, Shannon said that Lionbridge wants to protectively “bubble-wrap” CLS’s clients so it will go slow in integrating customer-facing contact points, processes, and production models.

Synergies will come from consolidation and leverage. Lionbridge will streamline duplicated corporate functions such as finance, tax, and filings. For example, it will combine offices where possible and standardize operations. She expects that some of the acquired company’s staff will assume senior roles in the expanded Lionbridge. The company anticipates that it will leverage CLS’s expertise and processes in post-edited machine translation, while bringing more of its own cloud technology stack and onDemand offerings to its new unit’s operations. Finally, she said that there is virtually no customer overlap, a good sign for revenue retention.

The geographic footprint fills some gaps for Lionbridge. Shannon said that CLS’s financial clients favor proximity of its providers, and its London, Hong Kong, and Zürich offices will continue serving them – and that these locations will be good additions to Lionbridge. The Swiss company also has data servers in the Euro zone and Switzerland, a competitive advantage when doing business in the region due to stringent European regulations for data security. Lionbridge will preserve these offices and data integrity, both critical assets and an attractive part of the acquisition.

What does this mean for the market?

It’s a win-win for Lionbridge and CLS. Lionbridge is bulking up and stabilizing its traditional business while pushing into new markets. Importantly, it decreases the risk associated with its dependence on the episodic tech sector. CLS, with relatively flat revenue over the last few years but a good customer base, expands its market presence and gains access to a global sales team.

The integration of two mature organizations is bound to come with friction. Both companies are experienced language providers with standardized processes and solid operations. Deciding which best practices to adopt will be a challenging exercise for both teams – that could leave some staff frustrated in the process.

Customers may reconsider their choice of vendor. As with any acquisition, clients bring their preconceptions and assumptions to the table, and some might choose not to stay. It will be interesting to see whether Lionbridge will keep CLS’s Swiss clients – a traditionally demanding customer base – and be able to grow them. That said, both companies’ clients have the potential to see benefit as each brings forward relationships, processes, and technology.

The deal establishes baseline values for the industry. CLS was not like most LSPs wanting to sell – it had private equity investors behind it with an expectation of cashing out. The transparency of the resulting deal will help other companies shopping the market now – or interested in putting themselves up for sale.

It opens up a gap between Lionbridge and other very large LSPs. Lionbridge shares the top of the LSP pyramid with HP-ACG (#2 on our list) and TransPerfect (#3), both of which were in a race for the topmost position. HP’s plans to split into two companies raises some uncertainty about its language services unit, which will likely go to Hewlett-Packard Enterprise. TransPerfect, which we projected in our June 2014 report on the language services market as being capable of taking over the top spot within a few years, is still struggling to sort out its leadership issues yet could decide to strike its own deal to capture the top spot that it has long coveted.